What is Treasury Bill – Important for JAIIB, Unit 4 of Principles and Practices of Banking Notes. Treasury bill (T-bill) is an instrument of short term borrowing by the Government of India maturing in less than 1 year. Treasury Bills, generally shortened as T-Bill, are categorized as money market instruments as they have a maturity a maximum maturity of 364 days. Money Market deals with instruments with a maturity of less than one year. Treasury Bills were first issued in India in 1917. Currently, Government of India issues four types of T-bills – 14-day, 91 days T-bill, 182 days T-bill and 364 days.
Features of Treasury Bill
- Amount – T-bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. T-bills are issued at a discount and are redeemed at par.
- Form – T-bills are issued either in physical form as a promissory note or dematerialised form by crediting to Subsidiary General Ledger (SGL) Account.
- High Liquidity – Treasury bills are highly liquid negotiable instruments, that are available in both financial markets, i.e. primary and secondary.
- Method of the auction – Uniform price auction method for 91 days T-bills, whereas multiple price auction method for 364 days T-bill.
- Eligibility – Individuals, firms, companies, trust, banks, insurance companies, provident funds, state government and financial institutions are eligible to invest in treasury bills.
- Issue – T-bills are issued at a discount and redeemed at par.
- Zero Risk – T-bills have assured yield and zero risk of default.
- Repayment – The repayment of the bill is made at par on the maturity of the term.
- Day count – The day count is 364 days, in a year, for treasury bills.
Besides this, other characteristics of treasury bills include market-driven discount rate, selling through auction, issued to meet short-term mismatches in cash flows, assured yield, low transaction cost, etc.
Types of Treasury bill
14 days T-bills – These bills matures in 14 days and are auctioned on Friday of every week.
91 days T-bills – These bills matures in 91 days. They are auctioned on Wednesday and the payment is made on following Friday.
182 days T-bills – These bills matures after 182 days, from the day of issue. They are auctioned on Wednesday of non reported week and repaid on following Friday, when the tenure expires.
364 days T-bills – The tenor of these bills is 364 days. They are auctioned on every Wednesday of reporting week and payment is made on following Friday after the tenure expires.
Participants in Treasury Bills
- Banks
- Primary Dealers (DFHI)
- Mutual Funds
- Insurance Companies
- Institutional Investors
- FIIs
- Corporates & Individuals through Demat Account
Importance of T-Bill
Safety – T-Bills are very safe as assured by Government. No Risk or zero risk of default as they are issued by Reserve Bank of India (RBI) on behalf of Government of India.
Liquidity – Investments in T-Bills are highly liquid because becuase they can be converted into cash anytime. DFHI which is primary dealer announced daily buying and selling rates for treasury bills. They can be discounted with the RBI and further refinance facility is available from RBI against these treasury bills. Hence there is good secondary market for treasury bills.
Good Short Term Investment – Cooperates and other entities can profitably invest idle cash in treasury bill for short period. Financial Institutions can also deploy their surplus funds on any day with assured yield on treasury bills.
Periodic and Known Availability – T-bills are periodically available through auctions. They are also available in secondary market. Fund managers of financial institutions build their portfolio of t-bills in such a way that date of maturity of t-bills may be matched with date of payments on various liabilities. Thus due to their liquidity and easy availability, it helps financial managers to manage their funds effectively and profitably.
Helps in SLR, CRR Requirements – Treasury Bills are eligible securities for SLR and CRR purposes.
Eligible for Repo Transactions – T-Bills are also eligible for Repo which mean they can be used as repo collaterals.
Good Source of Short Term Funds for Government
T-Bills are useful for implementation of Monetary Policy of RBI.
T-Bills can be used as a good hedge against heavy interest rate fluctuations in call money market. When the call rates are very high, money can be raised quickly against t-bills and invested in the call money market and vice-versa
